What is a credit rating?

A credit rating is an opinion on the relative degree of risk associated with

timely payment of interest and principal on a debt instrument.
It assesses the credit worthiness of an individual, corporation, or even a
country. calculated from financial history and current assets and liabilities. It
tells a lender or investor the probability of the subject being able to pay back
a loan.
Origin
The first mercantile credit agency was set up in New York in 1841 to rate the
ability of merchants to pay their financial Obligations. Later on, it was taken
over by Robert Dun. This agency published its first rating guide in 1859. The
second agency was established by John Bradstreet in 1849 which was later
merged with first agency to form Dun & Bradstreet in 1933, which became
the owner of Moodys Investors Service in
In India CRISIL (Credit Rating and Information Services of India Ltd.) was
setup in 1987 as the first rating agency followed by ICRA Ltd. (Investment
Information & Credit Rating Agency of India Ltd.) in 1991, and Credit Analysis
and Research Ltd. (CARE) in 1994. </li></ul><ul><li>Duff and Phelps has
tied up with two Indian NBFCs to set up Duff and Phelps Credit Rating India
(P) Ltd. in 1996
6. Importance of Credit Rating

Credit ratings establish a link between risk and return

They provide a yardstick against which to measure the risk inherent in

any instrument.
An investor uses the ratings to assess the risk level and compares the
offered rate of return with his expected rate of return

The risk perception of a common investor, in the absence of a credit

rating system, largely depends on his familiarity with the names of the

promoters or the collaborators

It is not feasible for the corporate issuer of a debt instrument to offer
every prospective investor the opportunity to undertake a detailed risk

evaluation.
It is very uncommon for different classes of investors to arrive at some

uniform conclusion as to the relative quality of the instrument.

Moreover they do not possess the requisite skills of credit evaluation.

How does a credit rating agency differ from a credit bureau?

A credit rating agency provides an opinion relating to future debt

repayments by borrowers.
A credit bureau provides information on past debt repayments by

borrowers.
Traders are generally the main users of credit bureau information,
financial investors typically use credit ratings.

Is credit rating necessary

Credit

rating

is

an

opinion

expressed

by

an

independent

professional organisation, after making a detailed study of all

relevant factors.
Such an opinion will be of great assistance to investors in making

investment decisions.
It also helps the issuers of debt instruments to price their issues
correctly and to reach out to new investors . </li></ul>

Accountability of a rating agency

A credit rating is a professional opinion given after studying all

available information at a particular point of time.

opinions may prove wrong in the context of subsequent events.
Investor is free to accept or reject the opinion of the agency.

A rating agency is expected to maintain the highest possible level of

analytical competence and integrity.

The credibility of a rating agency has to be built, brick by brick, on the
quality of its services

Ratings vary from agency to agency

The opinions given by two or more agencies will vary

it will be very unusual if such differences are very wide.
For example, a debt issue may be rated DOUBLE A PLUS by one agency

and DOUBLE A or DOUBLE A MINUS by another.

It will indeed be unusual if one agency assigns a rating of DOUBLE A
while another gives a TRIPLE B.

Monitor the issues already rated?

A rating is an opinion given on the basis of information available at a

particular point of time.

As time goes by, many things change, affecting the debt servicing

capabilities of the issuer,

It is essential that as a part of their investor service, rating agencies
monitor all outstanding debt issues rated by them.

Who pays for a credit rating?

The issuer pays for the credit rating.

the issuer-fee model naturally creates a potential conflict of interest
(that could lead to higher than warranted ratings)

Who regulates a rating agency?

The capital market regulator regulates rating agencies in most regions.

In India, the capital markets regulator, the Securities and Exchange

Board of India (SEBI), regulates the rating agencies in the country.

SEBI laid down an extensive set of regulations for rating agencies in
1999.

CRISIL

CRISIL is India's leading rating agency, and is the fourth largest in the

world.
over a 70% share of the Indian Ratings market
CRISIL has rated over 6,797 debt instruments worth Rs.13.53 trillion

issued by over 4,600 issuers

it has provided assistance and training for setting up ratings agencies
in Malaysia (RAM) and Israel and in the Caribbean .

Range of service

CRISIL rates long-term instruments such as debentures/bonds

Preference shares and fixed deposits
Short-term instruments such as commercial paper and short-term

deposits.
CRISIL has also pioneered the rating of subsidiaries and joint ventures

of MNCs in India
CRISIL undertakes credit assessments of state governments
it has rated state governments including those of Maharashtra,

Gujarat, Karnataka and Andhra Pradesh.

CRISIL was the first rating agency in India to rate banks, governments

and urban local bodies

Credit rating of real estate developers and projects , in association with

the National Real Estate Development Council,

Credit rating of parallel marketers of liquefied petroleum gas.
CRISIL Fund Services provides a range of rating, ranking, risk analytics
and valuation tools to the mutual fund industry.

CRISIL's association with S&P

CRISIL's association with Standard & Poor's, a division of The McGraw-Hill
Companies, dates back to 1996 when both companies started working
together on rating methodologies and joint projects. This partnership has
now culminated in Standard & Poor's acquiring a majority shareholding in
CRISIL .

Standard & Poor's, the financial services business of The McGraw-Hill

Companies, is the world's foremost provider of independent credit ratings,
indices, risk evaluation, investment research, data and valuations. With
6,000 employees located in 20 countries and markets, Standard & Poor's is
an essential part of the world's financial infrastructure